Homeowners Leverage Equity to Tackle Mounting Debt

As inflation continues to squeeze household budgets, cash-strapped Americans are increasingly turning to their home equity to consolidate debt and manage the rising cost of living. The resurgence in home equity lines of credit (HELOCs) comes at a time when many homeowners are sitting on near-record levels of equity, providing a potential lifeline to those struggling with high-interest credit card and other consumer debt.

Unlocking Home Equity to Conquer Debt

Tapping into Home Equity for Debt Consolidation

The use of HELOCs, a type of revolving loan that gained a troubled reputation during the 2008 financial crisis, is on the rise after hitting post-crisis lows two years ago. Mortgage lenders report that many of the HELOC applications they receive are now for the purpose of debt consolidation, as homeowners seek to leverage their home equity to pay down high-interest obligations.For Rochelle Adamson, a self-employed professional in Honolulu, Hawaii, a HELOC provided a lifeline to consolidate over $55,000 in debt across seven credit cards. "It's so much easier," she said. "You're taking it a little more seriously because it's not like you can just pull this card out and go to the store. It's attached to your bank account. You have to log in. It's attached to your home."

The Allure of Lower Interest Rates

The case for using a HELOC to consolidate debt is relatively straightforward. HELOCs typically carry fixed or floating rates, often tied to the prime rate plus an additional spread. This makes them one of the few loan types where interest rates adjust almost immediately after the Federal Reserve changes benchmark rates.While HELOC rates have recently averaged around 9%, which is higher than typical first mortgage rates, the math can still be appealing for those carrying balances on credit cards, where average interest rates have exceeded 21% as of May. "Interest can really play a big part in how much you can pay off, and how quickly," Adamson noted.

Responsible HELOC Usage is Key

However, there are reasons to be cautious about using a HELOC to pay down other debt. HELOCs are secured by one's home, meaning a lender could potentially seize the property if a borrower becomes delinquent. Additionally, some customers may be approved for a larger credit line than they need to consolidate their debt, making it important to maintain discipline and avoid overspending.Financial planner Gerika Espinosa emphasizes the need for responsible HELOC usage, likening it to "fire" that can "help one progress well if contained and managed well" or "get out of control and be a detriment to one's financial situation." She recommends using HELOCs for debt consolidation only when she's confident a client can live within their means and resist the temptation to tap into more credit than necessary.

A Cautious Comeback for HELOCs

While HELOC usage is on the rise, it remains a fraction of what it was during the financial crisis. Lenders extended more than $700 billion of these credit lines in early 2009, but now have around $379 billion on their books. Many banks exited the market or only sporadically offered HELOCs when interest rates were low.Non-bank lender Achieve, which began offering fixed-rate HELOCs aimed at debt consolidation in 2019, has taken a more conservative approach to underwriting. "None of our borrowers have lost their home," said the company's president of lending, Kyle Enright. "Very, very few of any borrowers who have taken out HELOCs in the last five to six years have lost their home. As long as the lender is employing reasonable underwriting standards, there is not a lot of risk to the consumer."